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Executive Summary

Amgen began U.S. clinical testing on recombinant erythropoietin (EPO) in December with its first target a 70,000-75,000 kidney dialysis population. The biotechnology company is singling out the dialysis submarket of anemia patients as a starting point for self-marketing efforts in the pharmaceutical business. According to Amgen's description of its EPO research and development work in a recent registration on a secondary stock offering, the firm views the dialysis market as tailor-made for the biotech company's first marketing venture. The dialysis market is well-defined in the U.S. and the current treatment for dialysis anemia consists of costly transfusions of blood or red blood cells. The dialysis anemia market in the U.S. appears similar in many respects to Genentech's first drug market for human growth hormone. In a preliminary prospectus dated Feb. 3, Amgen described the EPO dialysis indication as leading to an "important market [which] can be addressed in a relatively focused manner." The firm further noted an opening for genetically engineered EPO based on safety considerations. Amgen pointed out that current transfusion therapy exposes patients to risks of hepatitis and AIDS. Amgen is going to try to carve up the worldwide EPO market into three segments: reserving U.S. dialysis patients for itself; granting exclusive rights in Japan to Kirin; and Licensing exclusive rights to Johnson & Johnson in the rest of the world (except China). J&J also has rights to market EPO from Amgen for the non-dialysis anemia market in the U.S. Amgen explains that in EPO markets, "which require much broader marketing efforts and financial resources, Amgen has entered into joint venture arrangements with J&J and Kirin." The company estimates the chronic anemia market in the U.S. (a J&J market under the current licensing arrangements) as 2 mil. to 3 mil. patients. J&J's Ortho Pharmaceutical has the rights to the U.S. marketing. EPO was one of two Amgen drug products to enter clinical testing in December 1985. Amgen's work on interleukin-2 (IL-2) also reached the IND stage in December. Amgen claims that its form of IL-2, which the firm calls an "engineered variant" of the natural molecule, "is easier to purify, exhibits greater stability and has greater specific activity" than the naturally occurring form. J&J has exclusive worldwide marketing rights to Amgen's IL-2. After a productive year of IND filings with FDA in 1985, Amgen has five pharmaceuticals in clinical trials. In addition to EPO and IL-2, the company is testing an rDNA hepatitis B vaccine, gamma interferon and an amalgam of alpha and beta interferons called "consensus interferon." Amgen claims to have the most genetically-engineered products now in clinical trials. J&J's marketing rights to the Amgen products were acquired as part of a licensing agreement reached in September 1985 ("The Pink Sheet" Aug. 26, T&G-2). Amgen and its joint-venture with Kirin, Amgen-Kirin, received over $10.2 mil. from J&J in 1985 in payment for milestones reached in its drug development projects -- presumably the IND filings. In addition to milestone payments, "Amgen is paid for [J&J] research and development activities [on EPO, hepatitis B vaccine and IL-2] at specified amounts which approximate its actual costs," the prospectus notes. Amgen will conduct part of the R&D work on the products and will "supply certain quantities" of the three products to J&J. The prospectus indicates overlapping responsibility for clinical trials, noting that J&J will conduct clinical trials on the products as well as Amgen's ongoing work under its own INDs. J&J holds worldwide marketing rights to Amgen's subunit hepatitis B vaccine except for China, which is reserved for Amgen. The hepatitis B vaccine began clinical trials in October. Merck is in Phase III clinicals with a Chiron recombinant hepatitis B vaccine and expects approval of that product in 1986 ("The Pink Sheet" Feb. 3, p. 8). Amgen is riding the wave of 1986 IND filings, and the generally revived interest in biotechnology that followed the publicity surrounding the LAK cancer trials, to seek about $28 mil. in new financing. Amgen's current assets declined from $37.5 mil. at the end of March 1984 to $21.8 mil. at the end of December 1985. The offering is underwritten by Kidder, Peabody and Montgomery Securities. The increased capital could be used to offset industrial development loans for a major production plant expansion. The company is building a new production facility in Chicago, adding 40,000 sq. ft. for $12 mil. The company has outstanding loans and equipment commitments of about $8.5 mil. for the new facility. The Chicago facility will initially have "in excess of 5,000 liters of fermentation capacity and related separation and purification equipment." The plant will have floow space to permit expansion of that capacity by at least 50%. Amgen reports that the Chicago plant will be large enough to meet the demands for increased production of human pharmaceuticals and diagnostics for marketing. The company says that its 53,000 sq. ft. in Thousand Oaks, California is sufficient to meet demand for clinical trials. The new Chicago plant will also, Amgen said, "provide pilot production and scale-up process development of higher volume animal health care products and certain specialty chemicals." J&J's 1985 investment made it the third major partner in Amgen's development work. In addition to the previous work with the Japanese food firm, Kirin Brewery, Amgen is linked to Abbott in the diagnostics business through a five-year, $19 mil. agreement (until May 1988). Amgen has already received $9 mil. in payments under that agreement. The Abbott agreement has been providing a stable source of R&D funding of about $3.4 mil. annually since its inception. Abbott, which is the major single shareholder in Amgen, is primarily involved in the development of diagnostic products. However, Amgen noted that Abbott also has rights to "certain related therapeutics." Abbott owns 1.25 mil. shares of Amgen's common stock, which will represent 9.6% of the outstanding stock after the proposed offering. Key Amgen management also has ties to Abbott from previous work experience. Amgen Chairman and Chief Exec George Rathmann, PhD, was an Abbbott R&D exec from 1975 to 1980. Two senior VPs, Harry Hixson (business operations) and Robert Weist (Administration) also worked for Abbott before joining Amgen. The licensing of the three therapeutic agents to J&J just prior to the start of clinical trials apparently reflects Amgen's objective of holding the rights to a product until it is well into the development phase. Amgen's strategy, the company says, "is to retain the rights to its technologies and products until it determines that marketing or collaborative research and development arrangements with others may be advantageous." Amgen identified three drug development projects in the preclinical stage in the prospectus: epidermal growth factor (EGF); platelet derived growth factor; and insulin-like growth factors I and II. The firm says that EGF may have use as an ulcer treatment due to "its ability to suppress gastric acid secretion." The firm notes that the insulin-like growth factors are being investigated "in the regulation and control of growth of bone, muscle and connective tissue." One potentially large market being pursued by Amgen outside of pharmaceuticals is in the animal health area, where the firm is field testing its consensus interferon as a preventive for bovine respiratory disease (shipping fever). The firm says that shipping fever "is responsible for economic losses in the cattle industry, estimated at $300 mil. to $500 mil. per year." With 140 people directly involved in research, development and production, Amgen has an average of about 7 people for each development project described in the prospectus. The firm reports having 68 PhDs. Chart omitted.

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